A rally in the USD faltered on Monday with strong U.S. data doing little to lift the currency or convince investors that a slowdown in activity is over. The greenback traded in a narrow range as Japan kicked off a week of holidays, typically a period of thin liquidity that can prompt spikes in volatility.

A Federal Reserve policy meeting and a raft of global data including on U.S. core inflation and payrolls could each be the trigger for big currency swings this week.

All eyes are on the Fed to see what its policymakers made of a first-quarter gross domestic product report that showed strong growth of 3.2%, but largely for one-off reasons including a surge in inventories.

The dollar fell back on Friday despite the upbeat GDP report because core inflation slowed sharply, leading speculators to narrow the odds on a rate cut this year.

Most other major central banks have also turned dovish in recent months, keeping their currencies subdued.

The USD/JPY is underpinned by the huge 111.37 level, last Thursday's low, 30-DMA and a 38.2% retrace of the 109.70 to 112.40 (March to April) rise. We stay USD/JPY long for gains to our 112.50 objective, while our stop was raised to 111.30. A break and daily close below the 111.37 level will weaken the market and shift the overall risk back to the downside.

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Some words on recent data from Japan

Japanese companies' expectations for inflation over the next year stagnated, a Bank of Japan survey showed on Tuesday, underlining the daunting challenge facing policymakers as they seek to boost growth and prices amid slowing global demand.

Companies expect consumer prices to have risen 0.9% a year from now, unchanged from their projection three months ago, according to a quarterly survey by the BOJ.

Firms expect consumer prices to have risen by an annual 1.1% three years from now, unchanged from the previous survey. Companies also saw inflation at 1.1% five years ahead, slightly below a 1.2% increase expected three months ago.

The discouraging inflation expectations reading comes in the face of increasing risks to Japan's economy as global trade slows in a blow to profits and consumption.

There are also uncertainties over the government's plan to raise the sales tax later this year.

A separate survey from the BOJ on Monday showed business sentiment slumped to a two-year low in the March quarter, underscoring concerns that Sino-U.S. trade dispute and softening global demand were taking a toll on the export-reliant economy.

The BOJ's next policy meeting ends on April 25.

Core consumer prices rose an annual 0.7% in February, slower than a 0.8% increase in the previous month, while in the same period exports fell for a third month, suggesting the central bank might be forced to offer more stimulus eventually to temper the effects of slowing external demand and trade frictions.

Slowing global growth, the Sino-U.S. trade war and complications over Britain's exit from the European Union have already forced many policymakers to shift to an easing stance over recent months.

Many in the BOJ expect Japan's economy to emerge from the current soft patch in the second half of this year, assuming China's stimulus plans can revive demand there.

However, global trade friction will not subside as the United States re-negotiates trade deals to lower its trade deficit, meaning Japan's economic slowdown could be prolonged.

The government plans to raise the nationwide sales tax to 10% from 8% in October to generate extra revenue for rising welfare costs. This plan may weaken consumer spending.

Short-term trade idea

USD/JPY saw the second biggest one-day rise of 2019 according to prices, when it closed up 71 pips on Monday, to probe the 200-day moving average now at 111.48. A daily close above the 200-day moving average will unmask the 2019 112.13 high. Our short-term trade ideas is to  get long on dips at the 111.05, which is ahead of the 100-day moving average which is currently at 110.98.

Bank of Japan Governor Haruhiko Kuroda ruled out the chance of additional monetary easing, even after heightening overseas risks forced the central bank to temper its optimism that robust exports and factory output will support growth.

Kuroda also brushed aside growing calls from politicians and bank executives to raise interest rates or water down the BOJ's 2% inflation target to ease the strain of prolonged ultra-low rates on financial institutions' profits.

At the two-day rate review that ended on Friday, the BOJ maintained a pledge to guide short-term rates at minus 0.1% and 10-year government bond yields around zero percent. It also said it would continue to buy Japanese government bonds.

Factories across the globe slammed on the brakes last month as demand was hit by the U.S.-China trade war and slowing global growth. In a nod to the increased risks, the BOJ cut its assessment on overseas economies to say they are showing signs of slowdown. It also revised down its view on exports and output.

Kuroda acknowledged the challenges the economy faced but gave no indication there would be any additional stimulus. "It is true Japan's exports and output are being affected by slowing overseas growth," Kuroda said. "On the other hand, domestic demand continues to grow. As such, we maintain our baseline view that the economy is expanding moderately."

He said while it would likely take longer to achieve the BOJ's price target, most board members thought it most appropriate to "patiently maintain" current stimulus given some improvement in the output gap.

The BOJ faces a dilemma. Years of heavy money printing for asset purchases have dried up market liquidity and hurt commercial banks' profits, stoking concern over the rising risks of prolonged easing.

And yet, subdued inflation has left the BOJ well behind other major central banks in dialling back crisis-mode policies, leaving it with little ammunition to battle the next recession.

While Kuroda insists that hitting 2% inflation remains a priority, politicians and economists are increasingly expressing doubts about the target.

Finance Minister Taro Aso said on Friday that "things could go wrong" if the BOJ insisted too much on achieving 2% inflation.

Kuroda said the target was an important tool the BOJ uses to achieve its mandate of price stability.

"Inflation is affected by oil price moves and various other factors. We also need to understand it would take some time for inflation to pick up in Japan after a long period of low growth and deflation," Kuroda said, when asked about Aso's remarks.

Many in the BOJ expect Japan's economy to emerge from the current soft patch in the second half of this year, assuming Beijing's stimulus plans can revive Chinese demand.

The biggest worry among BOJ policymakers is that weakening exports and output will hurt corporate sentiment, prompting firms to delay capital expenditure and wage hikes.

Kuroda said that while such a risk cannot be ruled out, the chance of a deep economic downturn remains small.

The USD/JPY bulls have registered a daily close back above the 200-day moving average, which is currently at 111.44, which has strengthened the underlying bullish market structure. We opened EUR/JPY long at 126.00 in anticipation for gains to our 129.00 target. is an independent macroeconomic consultancy with thousands of subscribers all over the world. We provide fundamental research to help our clients make better investing decisions. Our subscribers should expect to get access to:

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